05VIENNA2126

This record is a partial extract of the original cable. The full text of the original
UNCLAS SECTION 01 OF 02 VIENNA 002126
SIPDIS

PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA
TREASURY ALSO FOR OCC/EILEEN SIEGEL
TREASURY ALSO PASS FEDERAL RESERVE

SECDEF FOR OSD/ISP/EUR

USDOC PASS TO OITA

USDOC FOR 4212/MAC/EUR/OWE/PDACHER

PARIS FOR USOECD

E.O. 12958: N/A

TAGS: ECON EFIN ELAB AU EUN

SUBJECT: AUSTRIA'S GROWTH FORECAST OPTIMISTIC, BUT
DOWNSIDE RISKS AND PERSISTENT UNEMPLOYMENT REMAIN

REFS: A) VIENNA 1097; B) 04 VIENNA 1124; C) 04 VIENNA

0273

§1. According to a recent forecast from the Austrian
Institute for Economic Research (WIFO), the Austrian
economy should grow at an average annual real rate of
2.3% during 2005-20009. WIFO cautioned that further Euro
appreciation would negatively affect this projection, and
that sustained growth would depend on increased domestic
demand, not only on export growth. Austria will benefit
from a dynamic global economy, including strong growth in
China and continued strong demand in neighboring markets
in Central and Eastern Europe. The WIFO projections
would exceed predicted average growth in the Euro area
and in Germany, but would be insufficient to reduce the
4.5% unemployment rate. Unemployment will remain a key
focus for domestic economic policies. End Summary.

Slightly Stronger Economic Growth Ahead

2. At a projected annual average growth rate of 2.3%,
Austria's growth over the next five years should outpace
the 1.6% recorded for the past five years (2000-2004),
according to the Austrian Institute for Economic
Research's (WIFO) recently revised mid-term forecast.

The main stimulus for Austria's growth will remain
exports. However, recovery of domestic demand will be
critical. WIFO believes strong export performance should
translate into more investment activity and private
consumption. Under these conditions, private consumption
should grow at an annual average rate of 2.1% during 2005-
2009, after growth of only 1.4% in 2000-2004. Rising
employment, lower inflation and the GoA's 2005 income tax
cut (ref C) should stimulate private consumption.

The International Scenario

413. WIFO based its 2005-2009 forecasts on the following
assumptions:

-- U.S. average economic growth of 3.3%;

-- EU-25 average economic growth of 2.3%;

-- Euro area average economic growth of 2.1%;

-- average economic growth in the new EU-10 of 4.4%;

-- German average economic growth of 1.5%;

-- oil prices averaging USD 38 per barrel, with a decline
from USD 44 per barrel in 2005 to USD 36 in 2008-2009;
and

-- an average dollar/Euro exchange rate of 0.81, with an
improvement from 0.75 in 2005 to 0.87 in 2009.

94. The forecast assumes continued dynamic developments
in the world economy, particularly in China, which
remains a driving force for global economic growth. WIFO
predicts growth in the U.S. will weaken slightly because
of higher interest rates and a more restrictive fiscal
policy, but will remain higher than in the Euro area.
Austria will continue to benefit from the dynamic global
economy because of its favorable international
competitiveness (a result of high productivity increases
and moderate wage increases in recent years), strong
demand in neighboring Central and Eastern European
markets, and GoA policies promoting a more competitive
business environment.

Risks - Exchange Rates, Oil Prices, Private Consumption
15. A major caveat for the forecast is a deterioration of
international parameters, especially the overvalued Euro.
WIFO assumes a gradual depreciation of the Euro vis--vis
the USD. Any further appreciation of the Euro would

cable is not available.

dampen growth in the entire Euro area. A permanently
high oil price would have a similar effect. In the Euro
area, there is an additional risk that economic policies
to overcome weak domestic demand will not be effective.
Thus, this forecast clearly bears more downside risks,
according to WIFO.

Persistent Unemployment - The Major Issue

6. There will be no turn-around in the labor market.
The projected average economic growth of 2.3% will
produce about 30,000 jobs annually (job growth rate of
0.9%). However, this will still be insufficient to
produce a decline in the unemployment rate. Labor supply
will keep pace with increasing labor demand, because of
demographic developments - increased numbers of young
people entering the labor market, pension reform that
effectively raised the retirement age, and the continued
influx of foreign labor. Thus, Austria's unemployment
rate will remain at 4.5% throughout the entire 2005-2009
period.

S17. Michael Landesmann, Research Director of the renowned
Vienna Institute for International Economic Studies, said
in a June 20 press interview that Austria would go

through a structural crisis in the labor market over the
next several years. According to Landesmann, the
situation would be similar to the U.S. experience in the
1980s, when companies recorded strong profits, but shed
jobs.

Comment

418. WIFO's cautious assumption that economic growth in
2005-2009 will reach the long-term average of about 2.5%
may be too optimistic. Growth in the first quarter of
2005 (only 0.2% over the fourth quarter of 2004) was
unexpectedly weak and therefore it is unlikely growth
will achieve the projected 2005 growth rate of 2.2% (ref
A). Stronger projected growth in 2005-2009 clearly
represents upper limits. For domestic economic policies,
the unemployment situation will remain key. The GoA has
already downgraded its expectations - its 2002 National
Action Plan for Employment (NAP) projected an
unemployment rate of 3.5% for 2002, but the 2004 NAP
revised the prediction upward to 4.3% for 2005.

9. WIFO Forecast of Economic Indicators for Austria
(average annual percent change, unless
otherwise stated)

2000/2004 2005/09

Real terms:

GDP

Private consumption

Public consumption

Plant and equipment investment
of which:

NOrRF
PWRO
NONN
ar WwW

machinery and equipment 3.7 3.5
construction 0.8 1.8
Domestic demand 1.0 2.0
Exports 6.2 6.4
Imports 5.2 6.3

Other indices:

GDP deflator

Consumer prices

Employment growth
Unemployment rate (in percent)
Per capita payrolls, gross

NBOPRPR
OoOrWODd
NBORPH
WUwWorAd)d

BROWN